China’s CPI fell back to deflation at -0.2% y/y in Oct due to a larger decline in food prices. Core inflation (excluding food & energy) and services inflation were both lower at 0.6% y/y (Sep: 0.8%) and 1.2% y/y (Sep: 1.3%) respectively in Oct. 

The weaker price pressures reflected generally sufficient supply of agricultural products while consumer demand fell after the holidays. Furthermore, the decline in travel demand after the holidays also led to lower air ticket and tourism prices which kept non-food prices flat on a m/m basis. 

We maintain our forecast for headline inflation at 0.4% in 2023 before strengthening to 1.7% in 2024. We expect the PPI to decline by -2.9% in 2023 and turn positive to 0.6% in 2024.

The weak inflation and growth backdrop lends support to the case for further monetary policy easing. We keep our call for a further 10 bps cut to the 1Y LPR and 20 bps cut to the 5Y LPR in 4Q23 to bring the rates to 3.35% and 4.00% respectively by year-end. A further cut to banks’ reserve requirement ratio is also possible to provide additional liquidity.